Market Overview

Why It Might Be Time For This Obscure Geared ETF

Why It Might Be Time For This Obscure Geared ETF

A combination of falling interest rates and investors' thirst for defensive assets has made the consumer staples one of 2019's best-performing groups. The Consumer Staples Select Sector Index, a widely observed basket of staples stocks, is up more than 20% this year.

What Happened

Dow components Coca-Cola (NYSE: KO) and Procter & Gamble (NYSE: PG) have been leading the consumer staples sector higher this year, along with the likes of PepsiCo (NASDAQ: PEP) and Colgate-Palmolive (NYSE: CL).

Trouble is, with that leadership, the consumer staples sector is getting frothy on valuation. And that's potentially problematic because the group usually trades at a premium to the broader market due to its low volatility characteristics.

Why It's Important

Those elevated valuations could open the door to opportunity with the Direxion Daily Consumer Staples Bear 3X Shares (NYSE: LACK). LACK, which debuted last November as the first inversely leveraged fund dedicated to the staples sector, looks to deliver triple the daily inverse returns of the Consumer Staples Select Sector Index.

In a note out Wednesday, Credit Suisse analyst Kaumil Gajrawala highlighted that aforementioned quartet of staples names as being pricey.

“With these stocks trading at 15-year peak valuations, Gajrawala wrote that he is neutral to negative on the space, and is concerned that investors are overlooking necessary investments at some companies, like Pepsi and Coke, that could require 'years-long spending,'” reports Teresa Rivas for Barron's.

What's Next

The bearish LACK could also be boosted by a strong dollar, a scenario that would appear to lend itself to defensive positioning, but one that would pinch the export-heavy staples sector. With third-quarter earnings fast approaching, this is something for traders to consider as the dollar could be an issue brought up by staples executives on earnings calls.

“The strength of the U.S. dollar is a headwind, as is the fact that organic-revenue improvement in the first half of the year was largely driven by changes to pricing and mix made in the fall of 2018, setting up difficult comparisons in the second half of the year,” according to Barron's.

Related Links:

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